Serbian town in the winter

Serbia Monetary Policy November 2020

Serbia: Central Bank holds rates in November but ramps up liquidity measures

The Executive Board of the National Bank of Serbia (NBS) opted to stand pat at its 12 November meeting, keeping the key policy rate at the all-time low of 1.25%. This marked the fifth consecutive hold, and met market expectations. However, the country is experiencing a third wave of Covid-19, with new cases spiking markedly above the prior two waves. The NBS consequently announced two liquidity lines—foreign-exchange purchase swap auctions and securities purchase repo auctions—to provide the banking sector with ample and cheap credit, which should trickle down to the corporate sector and support recovering domestic demand.

The decision to keep the policy rate unchanged reflected the Board’s assessment that previous monetary and fiscal policy decisions have been supporting financing conditions for businesses and households, and will continue to do so, which should buttress disposable income. The NBS stated that the drop in activity in Q2 was softer than initially anticipated and the recovery in Q3 was stronger than previously estimated, which, according to the Bank, was due to previous policy actions. Turning to price pressures, the Board emphasized that inflation has remained low and stable during the health crisis, thanks to a relatively stable exchange rate and well-anchored inflation expectations. The NBS projects inflation to fluctuate around the lower half of the 1.5%–4.5% target band, before gradually moving to the midpoint of the target range in 2022.

The Bank’s statement hinted at potential additional rate cuts moving forward, stating that the Bank’s inflation expectations “indicate that there is room for additional monetary policy easing in the period ahead”. Moreover, the NBS added that it is “ready to respond in the event of exacerbated negative effects of the pandemic on movements in the domestic and international environment”.

The next meeting is scheduled for 10 December.

Mauro Giorgio Marrano, senior CEE Economist at UniCredit, expects the Bank to deliver a 25-basis-point rate cut in December, adding:

“We believe there are various arguments for a policy rate cut. First, growth in 3Q20 was better than expected […] but the second wave of the pandemic led to a deterioration in the growth outlook. […] Second, monetary conditions will ease further in the eurozone, boding well for Serbian financial assets. […] Third, we expect inflation to remain below the target of 3.0% in 2020 and 2021. […] Fourth, pressure on the dinar has diminished since the summer. ”

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